There are numerous types of investments, which vary on their potential risk and return. There are also various types of investment to choose from, but it mainly depends on every individual’s risk appetite and wanted returns. ETFs provide a low-risk investment, which allows investors to quickly get into trading. Thus, this article would talk about why one should start their investing journey first in an Exchange-Traded Fund.
So, what is an Exchange-Traded Fund? ETF is a security that follows an index, sector, commodity, or other assets that can be traded on a stock exchange because it is just like a stock. It can also be structured to trace various things that include the price of an individual commodity to a more extensive and diverse set of securities. ETFs also have multiple types, including bond, industry, commodity, currency, and inverse Exchange-Traded Fund. Now, it has been defined; the investor must now know the style of investment they are into.
Choosing a Preferred Investment Style
It is essential to know one’s goal in investing that includes the individual’s ability to risk. Here are some steps that would help in identifying one’s preference when investing:
- Identify first if the investment that will be done will be actively or passively managed by the investor.
- Then, the investor must decide if they want to invest based on the growth or value of the company.
- Lastly, they must distinguish their preference in choosing between companies with small or large capital.
The three steps that were mentioned would gladly help investors know what they really want to aim for. Therefore, it follows the identification of one’s capacity to take a risk.
Determining One’s Risk Appetite
Every individual has their own capacity because they are different from one another. Identifying one’s risk appetite is essential to be able to know what their limit is in investing. Here are some factors that would help in determining one’s risk preference:
- Time Horizon. The investor must determine the amount of time that they would want their money to be invested, so trading in a short amount of time would incur a significant loss on return. Therefore, a more extended period would enable investors to redeem what they have lost.
- Bankroll. Then, the investor needs to know the amount of money they can stand to lose, which is essential in determining one’s risk tolerance. When investing, investors must also keep in mind that they should only use the amount they can afford because it will significantly impact one’s sanity if unexpected losses occur.
Types of Risk-Taker
The two indicated factors that would help in identifying what type of risk-taker the investor is would easily classify themselves among the following:
- Risk-Averse. When the investor identified that they hate losing the money they have used, they would try to avoid taking a risk as much as possible.
- Risk Neutral. When the investor does not care whether they are earning or losing money that they have invested.
- Risk Loving. When the investor likes gambling and taking chances with their invested money, it could be inferred that they are investors that have a high-risk tolerance.
If the investor has identified what type of investment they want, it would be easier to make decisions. If the investor is a beginner in investments and found out that they are risk-averse, the most likely choice would be investing in ETFs.